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Business economics and strategy

Business economics and strategy. Petros Kavassalis petros@rpcp.mit.edu Unit 1: Generic concepts. Principles of Economics. A. Marshall (1842-1924): “Economics is a study of wealth and a part of the study of man” Man’s action (economic action) produces wealth = F (work, material resources)

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Business economics and strategy

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  1. Business economics and strategy Petros Kavassalis petros@rpcp.mit.edu Unit 1: Generic concepts

  2. Principles of Economics • A. Marshall (1842-1924): “Economics is a study of wealth and a part of the study of man” • Man’s action (economic action) produces wealth = F (work, material resources) • The ends of economics action are seen to be: • the satisfaction of human wants... • … through the provision of goods and services • Goods and services are supplied by: PRODUCTION- EXCHANGE • … and limited by: SCARCITY OF RESOURCES and TECHNOLOGY • Efficiency: Satisfying wants within resource and technological constraints (static definition) • Efficiecy also is: Continuously producing new technologies and new resources (dynamic definition) Univ. of Crete/Dpt of Econ./2001-2002

  3. How efficiency comes up? • Through co-ordination • F. Hayek (Nobel Prize in 1974): • Wants, technology and resources are dispersed • Efficient outcomes can be achieved only through economic coordination • Information or Knowledge: the basis for coordinating economic activity • In markets, institutions (for ex. standards) and prices function to communicate information dispersed among economic agents (i.e., coordinate economic action) • Conclusion: MARKETS efficiently allocate resources by communicating information Univ. of Crete/Dpt of Econ./2001-2002

  4. How markets coordinate? • Market clear… or prices clear market: Supply and demand will come into equilibrium to determine price and quantity • Prices and quantities are depending on the particular characteristics of supply and demand • Prices and quantities vary over time depending on how supply and demand correspond to other economic variables, such as aggregate economic activity, labor costs, TECHNOLOGY (endogenous parameter) etc. • The market mechanism: the tendency in a free market for the price to change until the market clears S Price surplus P1 P0 P2 D shortage Quantity Q0 Univ. of Crete/Dpt of Econ./2001-2002

  5. Markets and… • Markets: Institutions that succeed to coordinate the economic activity • transmitting information (through prices) • making convergent individual beliefs and plans • selecting (and rejecting) • Hierarchies: Business firms, i.e. organizations, that know how to do things • thinking • organizing resources • transacting Univ. of Crete/Dpt of Econ./2001-2002

  6. The role of organizations • R. Coase (“The Nature of the Firm”): Within the firm, coordination takes place through orders and control… • There is a cost of using the price mechanism • To avoid the cost economic agents form an organization and allow some authority (an entrepreneur) to direct the resources • O. Williamson (“Transaction Costs”): … basically management (markets and hierarchies) • Hierarchy is centralized decision-making relative to an external market and not authoritative control within the organization • Hierarchies serve to economize on transaction costs • Conclusion: • Markets coordinate through prices • In Organizations, the management coordinates transactions and other activities and… Univ. of Crete/Dpt of Econ./2001-2002

  7. There is an interplay markets-firms • Markets: Emerging transactions between consumers and producers determine • choice of products and volumes • prices (and, partially, conditions of competition) • profits • Firms: Competencies developed within firms and coordination through management • explore both existing and new opportunities • create competitiveness and potential for profits • transform industries and markets by altering conditions of competition • FIRMS: Repositories of knowledge (not only production units or information processors) (Nelson and Winter, 1982) • MARKETS: Selection machines Univ. of Crete/Dpt of Econ./2001-2002

  8. How decide? • TRANSACTIONS COSTS (O. Williamson, 1975) • Different types of business have different transactional requirements • When the process of exchange becomes too difficult, expensive, unpredictable, firms decide to expand their boundaries to organize internally those areas once managed through areas once managed through exchanges based on prices • Firms grow and change in response to the dynamics of transactions • RESOURCE-BASED VIEW (E. Penrose, 1959) • Firm is both an administrative organization and a collection of productive resources • i.e. dynamic organizational capabilities • There are many types of arrangements where injecting market-like incentives might be quite destructive of the cooperative activity and learning • Capabilities/competencies cannot be assembled through markets • Firms grow and change on the basis of their capabilities/competencies Univ. of Crete/Dpt of Econ./2001-2002

  9. Growth of (knowledge) of form Internal learning MANAGEMENT & TECHNOLOGICAL OPPORTUNITIES (Constraints or potential) Information (e.g. costs) Knowhow (e.g. process) Combinative capabilities External learning Sales to current markets Market opportunities (from Kogut and Zander, 1997) Univ. of Crete/Dpt of Econ./2001-2002

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